Do Portuguese mutual funds display forecasting skills?

Nuno Manuel Veloso Neto, Júlio Fernando Seara Sequeira da Mota Lobão and Elisabete Simões Vieira

Studies in Economics and Finance, 2017, vol. 34, issue 4, 597-631

Abstract: Purpose - This study aims to evaluate the performance of the Portuguese fund managers by examining the selectivity and market timing skills of 51 Portuguese mutual funds from June 2002 to March 2012. Design/methodology/approach - The authors assess empirically the performance of a sample of funds by applying the unconditional and conditional models ofTreynor and Mazuy (1966) andHenriksson and Merton (1981). Findings - The results suggest that, overall, the Portuguese mutual funds do not possess selectivity or timing skills. However, regardless of the model used, the domestic equity funds exhibit a statistically significant market timing ability. Furthermore, the domestic and North American equity funds display positive selectivity during bull markets and timing skills during bear markets. Additionally, there is some evidence that older funds are better stock pickers than younger funds. Research limitations/implications - To address some of the limitations of this study, the authors suggest for further research correcting theTreynor and Mazuy (1966) model for the convexity cost of replicatingMerton’s (1981) option approach. Additionally, for further research, we suggest using a bigger sample, higher frequency data, as such data may lead to higher frequency of timing ability as proposed byBollen and Busse (2001). To overcome some of the limitations of traditional models, future research may consider usingJiang’s (2003) nonparametric test, as it is not affected by manager’s risk aversion, orFerson and Khang (2002)conditional performance evaluation using portfolios holdings. Originality/value - The authors contribute to the current literature by extending the period of study to 10 years in comparison to previous studies; extending the sample of funds to 51; addressing, for the first time in this context, the importance of public information on funds’ performance, through the comparison of unconditional and conditional models ofTreynor and Mazuy’s (1966) andHenriksson and Merton’s (1981); and, for the first time in the Portuguese context, analysing the relationship between funds’ size, age and market cycles and selectivity and market timing skills.

Keywords: Portugal; Market timing; Mutual funds; Selectivity; Conditional performance evaluation (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:sef-09-2015-0233

DOI: 10.1108/SEF-09-2015-0233

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